Legislature(1997 - 1998)
01/28/1997 10:08 AM House O&G
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* first hearing in first committee of referral
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= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
JOINT HOUSE RESOURCES STANDING COMMITTEE/
HOUSE SPECIAL COMMITTEE ON OIL AND GAS
January 28, 1997
10:08 a.m.
RESOURCES MEMBERS PRESENT
Representative Scott Ogan, Co-Chairman
Representative Beverly Masek, Vice Chair
Representative Ramona Barnes
Representative Fred Dyson
Representative Joe Green
Representative William K. ("Bill") Williams
Representative Irene Nicholia
Representative Reggie Joule
RESOURCES MEMBERS ABSENT
Representative Bill Hudson, Co-Chairman
OIL & GAS MEMBERS PRESENT
Representative Mark Hodgins, Chairman
(Representative Scott Ogan)
Representative Norman Rokeberg
Representative Joe Ryan
Representative Con Bunde
Representative Tom Brice
Representative J. Allen Kemplen
OIL & GAS MEMBERS ABSENT
All Oil & Gas members present
OTHER HOUSE MEMBERS PRESENT
Representative Gene Kubina
COMMITTEE CALENDAR
HOUSE CONCURRENT RESOLUTION NO. 1
Relating to a new Alaska liquefied natural gas project.
- MOVED CSHCR 1(WTR) OUT OF COMMITTEE
PREVIOUS ACTION
BILL: HCR 1
SHORT TITLE: NORTH SLOPE NATURAL GAS
SPONSOR(S): REPRESENTATIVE(S) BARNES, Phillips, Rokeberg, Kubina,
Kott, Sanders, Williams, James, Vezey, Austerman, Davis, Hodgins,
Ryan, Dyson, Davies
JRN-DATE JRN-PG ACTION
01/13/97 20 (H) READ THE FIRST TIME - REFERRAL(S)
01/13/97 20 (H) WTR, OIL & GAS
01/16/97 92 (H) RES REFERRAL ADDED
01/23/97 (H) WTR AT 3:00 PM CAPITOL 124
01/23/97 (H) MINUTE(WTR)
01/24/97 134 (H) WTR RPT CS(WTR) 7DP
01/24/97 135 (H) DP: PHILLIPS, COWDERY, AUSTERMAN
01/24/97 135 (H) KUBINA, KOTT, NICHOLIA, BARNES
01/24/97 135 (H) 2 ZERO FISCAL NOTES (DNR, REV)
01/24/97 135 (H) REFERRED TO RESOURCES
01/24/97 139 (H) COSPONSOR(S): DAVIES
01/28/97 (H) RES AT 10:00 AM HOUSE FINANCE 519
01/28/97 (H) O&G AT 10:00 AM HOUSE FINANCE 519
WITNESS REGISTER
JOHN T. SHIVELY, Commissioner
Department of Natural Resources
400 Willoughby Avenue
Juneau, Alaska 99801-1724
Telephone: (907) 465-2400
POSITION STATEMENT: Provided department's position and answered
questions regarding CSHCR 1(WTR).
DAVID LAWRENCE, Gas Commercialization
and Marketing Manager
ARCO Alaska, Inc.
P.O. Box 100360
Anchorage, Alaska 99501
Telephone: (907) 263-4939
POSITION STATEMENT: Provided overview and testified in support of
CSHCR 1(WTR).
MARK BENDERSKY, Commercial Manager for Gas
BP Exploration (Alaska) Inc.
P.O. Box 196612
Anchorage, Alaska 99519-6612
Telephone: (907) 564-4666
POSITION STATEMENT: Testified in support of CSHCR 1(WTR).
BEVERLY MENTZER, Manager
Business Development
Natural Gas Department
Exxon Company, U.S.A.
P.O. Box 2180
Houston, Texas 77252-2180
Telephone: (713) 656-6145
POSITION STATEMENT: Testified in support of CSHCR 1(WTR).
WAYNE LEWIS, Vice President
Yukon Pacific Corporation
1049 West 5th Avenue
Anchorage, Alaska 99501
Telephone: (907) 265-3100
POSITION STATEMENT: Testified in support of CSHCR 1(WTR).
ACTION NARRATIVE
TAPE 97-4, SIDE A
Number 0001
CO-CHAIRMAN SCOTT OGAN called the Joint House Resources Standing
Committee/House Special Committee on Oil and Gas meeting to order
at 10:08 a.m. Present at the call to order were Representatives
Ogan, Masek, Barnes, Dyson, Williams, Joule, Hodgins, Ryan, Kemplen
and Brice. Representatives Rokeberg, Bunde and Nicholia joined the
meeting at 10:10 a.m., 10:12 a.m. and 10:14 a.m., respectively.
Co-Chairman Ogan announced that Representative Green was at a news
conference; he joined the meeting at 10:45 a.m. Absent was
Representative Hudson, who was out of town.
HCR 1 - NORTH SLOPE NATURAL GAS
Number 0043
CO-CHAIRMAN OGAN announced the purpose of the meeting was to
consider CS for House Concurrent Resolution No. 1(WTR), relating to
a new Alaska liquefied natural gas project. He advised that
although the committees were meeting jointly, only the House
Resources Committee could vote or take other action.
CO-CHAIRMAN OGAN stated that CSHRC 1(WTR) is important for Alaska's
future. "Many people in the last few years have been predicting
doom and gloom for the state, and I believe them to be wrong," he
said. "And I believe that Alaska has a bright future in ...
natural resource development. And this gas pipeline will play a
huge role in that future. I want to assure those Alaskans who are
watching today that we, the legislature, will be doing all we can
to make sure this gas line becomes a reality. I want to assure the
oil companies that this issue will not be dropped, and that as
chairman of this Resources Committee, I ... and others in this
legislature will be doing everything we can to facilitate ... this
project."
CO-CHAIRMAN OGAN believed responsible development of Alaska's
resources would ensure a strong and diversified economy. He
concluded by saying, "The people of Alaska are who we serve, and
they are the reason why this project is so important."
Number 0080
CO-CHAIRMAN OGAN invited Representative Hodgins, Chairman of the
House Special Committee on Oil and Gas, to comment before
Representative Barnes presented the resolution.
CHAIRMAN MARK HODGINS deferred to Representative Barnes.
Number 0086
REPRESENTATIVE RAMONA BARNES, sponsor of CSHRC 1(WTR), explained
that the resolution was the outgrowth of a task force created by
the legislature under HJR 54 the previous session. "We on the task
force, Representative Kubina, Senator Sharp and Senator Duncan,
worked all during the interim to find out what we needed to do to
make the gas line a reality," she said. "We've had a number of
hearings. We are charged by the resolution to present to the
legislative body a report by February 1. That report will be
ready. It will be on your desk. And the outgrowth of all those
hearings is House Concurrent Resolution No. 1."
Number 0111
REPRESENTATIVE BARNES noted that before the committees was CSHCR
1(WTR). The House Special Committee on World Trade and
State/Federal Relations had added a section on page 4, lines 2
through 6, which had inadvertently been omitted in the drafting of
HCR 1. That section spoke to the year 2005 as being the targeted
time frame.
Number 0120
REPRESENTATIVE BARNES read the sponsor statement for the
resolution: "CSHCR 1(WTR) urges the establishment of a stable
fiscal and regulatory environment in order to provide the best
opportunity for a new LNG project to be economically viable and
attractive. To ensure economic viability, a huge volume of 14
[million] metric tons of gas must be sold per year. The proposed
LNG project would transport and market the North Slope gas
resources in the Asian Far East market. It is believed that there
exists an opportunity in 2005, when demand in that market will rise
enough to accept the volume of gas which this project will provide.
A critical element is the likelihood Alaska's huge volume of gas
could be displaced from the market for many years if smaller, more
easily placed projects come on-line first.
"CSHCR 1(WTR) encourages the Governor to work with the North Slope
leaseholders as well as the legislature, the federal government and
Congress to develop and complete the LNG project.
"The Governor is asked to work with leaseholders to develop a
contract for execution with those who appear likely to become
sponsors of the project. The contract would point out the nature,
degree and duration of fiscal terms for the project and
contractually guaranteeing the terms. The contract would be
submitted to the legislature for ratification. The Governor would
also provide the legislature with enabling legislation to authorize
the State of Alaska to formally enter into the contract.
"The legislature encourages potential sponsors of the LNG project
to find suitable measures to support and encourage Alaska
businesses and residents to participate in construction and
operation of the project.
"If built, the project would also be constructed so as to enable
the marketing of the gas to Alaska communities.
"The Governor is asked to work with leaseholders and Alaska's
congressional delegation to identify appropriate federal action to
help expedite the project. He is also asked to identify and report
to the legislature the form of participation in the project by the
State of Alaska."
Number 0169
REPRESENTATIVE BARNES believed if competing projects worldwide
entered the liquefied natural gas (LNG) market before Alaska's
contracts were in place, it would doom Alaska's natural gas
pipeline "in our lifetime" because of the huge volume of gas that
Alaska needed to put into that pipeline. "The ramp of time that is
needed is a very short ramp of time to make this project
economically feasible," she concluded.
Number 0186
REPRESENTATIVE NORMAN ROKEBERG commended the interim task force.
He referred to recent news reports discussing the potential
diminution of gas availability in the Cook Inlet area, which he
found disturbing. He asked, "Did the committee consider that
potentiality? I know there's been discussions of a potentiality
for a spur line going to tide water in the Cook Inlet area. Do you
think that would be appropriate, to add a further resolve here, or
did you consider that in your hearings?"
Number 0202
REPRESENTATIVE BARNES replied, "There is a resolve in the
resolution that talks about the use of gas within the Alaska
community. Cook Inlet specifically was not an issue until most
recently. Most recently, I understand that there has been
discussion of the Marathon contracts. They have applied for a
continuation to export gas. There is discussion that that gas
might not be available. Unocal, there's discussion that they may
have to ... move the fertilizer plant. There is plenty of use for
some of this volume of gas to be used in the state of Alaska, not
just in the Cook Inlet area."
REPRESENTATIVE BARNES continued, "At the point of termination of
this pipeline, I also believe that up and down the railbelt, as we
work toward interties to tie the railbelt together in a utility
corridor, there exists that possibility of using some of the
natural gas, because you and I both know without a form of energy
that is both cost-effective and stable over a long term, then
Alaska will never reach its potential. So there is embodied in
this resolution the answer to your question in the form of some of
this gas being made ... to be used in the Alaska community."
CO-CHAIRMAN OGAN noted that Representatives Rokeberg, Bunde and
Nicholia had joined the meeting.
Number 0235
REPRESENTATIVE CON BUNDE referred to media reports about possible
new taxes on the gas industry if they did not comply with certain
requirements. He asked if those fell under the stable fiscal
policy Representative Barnes had mentioned.
Number 0145
REPRESENTATIVE BARNES responded, "If there is no gas in the
marketplace, or this gas pipeline was not built, we won't have to
worry about a stable fiscal policy." She held up a chart entitled
"TAGS Competition: Other `Grass Roots' LNG Projects." She said,
"[T]hat statement was made by me not in the World Trade committee
but in the working group, and it was based on this schematic,
showing all the projects in the world, that if we aren't able to
bring forward our gas pipeline in a timely manner, that these
projects are competing with our gas pipeline." Representative
Barnes said if one or more oil company was dragging its feet on
this pipeline, another way must be found to encourage them to bring
the gas line into production.
REPRESENTATIVE BUNDE suggested that changed the philosophy of this
legislature regarding taxes.
Number 0263
REPRESENTATIVE BARNES said it did not change her policy. She
emphasized she had never been involved with legislation that
created a tax. However, she was not above finding ways to ensure
development of this gas pipeline in a timely manner. She said,
"This is a resource belonging to the people of this state, and no
one has the right to deny that resource being put into the
marketplace."
Number 0278
REPRESENTATIVE BILL WILLIAMS referred to Representative Barnes's
mention of getting gas to the people of Alaska as well. Noting one
proposed schematic for a gas pipeline from Fairbanks to Valdez, he
asked about other possible routes including Anchorage.
REPRESENTATIVE BARNES indicated other routes were possible.
However, the only permits available, to her knowledge, were from
Prudhoe Bay to Valdez. She was unaware of any discussions of
putting that gas pipeline in any other direction. She believed to
do that would require an extensive time period to bring new permits
into the system.
REPRESENTATIVE BARNES recalled that during task force discussions,
mention had been made of bringing gas to market across Western
Alaska. She stated, "My position on that, and it is contained in
the report that will be submitted to the legislature, is that to
bring this gas to market across Western Alaska, there were no
permits, there are still no permits. It would delay the project
probably 20 years. So, when you are dealing with a permitted
project, where the permits are in place, versus a pie-in-the-sky
scheme, then you have to look to what is feasible in a short time
frame to get us into the world market."
Number 0311
REPRESENTATIVE WILLIAMS acknowledged the permit system was
complicated and time-consuming. However, he wondered if the rail
corridor had been considered. He was trying to get the gas to
Anchorage, where Alaskans could use it first. Electrical power was
expensive and yet here was a large resource. "And we can't get it
to our people," he said. "We're going to export it."
Number 0329
REPRESENTATIVE BARNES noted that the Cook Inlet Basin and the
developed gas fields in Cook Inlet were some 150 miles from
Anchorage. "And we are using that gas from those fields
presently," she said. "And I do believe that if this route were
from Prudhoe Bay to Valdez, that we would also have access to that
gas, and it would also be, of course, usable. If it's usable in
Anchorage, it would be usable in the Copper Valley area as well as
in Fairbanks."
Number 0339
REPRESENTATIVE ROKEBERG said the key to this resolution was the
requirement that the Governor enter into negotiations with the
producers on the North Slope. He asked Representative Barnes how
she contemplated the legislature having any input into the terms
and conditions of this contract. He said it appeared there was no
specified time frame for delivery to the legislature of the LNG
project contract.
REPRESENTATIVE BARNES responded that she did not believe the
legislature could impose upon the Administration a time certain
when they should come back. She believed they understood the short
time frame required. "They have been working on it, just as the
task force has been," she said. Representative Barnes explained,
"[W]hat we have said in this resolution, how the legislature as the
representatives of the people would be involved, that the
Administration must bring back to the legislature for ratification
any contracts that they might enter into, and that they have to
bring back also a piece of enabling legislation to allow them to
... do that. That is the way the legislative branch would have the
opportunity to look at the terms and to see if those were
acceptable to the people they represent."
Number 0368
REPRESENTATIVE TOM BRICE said to Representative Barnes, "You do ...
have a resolve, then, where the Governor will ask the legislature
to ratify a contract." He asked whether she envisioned a special
session if an agreement were made and a contract were offered
during the interim.
REPRESENTATIVE BARNES replied that because the Administration had
been working for some time with the producers and holders of the
permits, she hoped they could bring it before this legislature
prior to adjournment. However, she would not oppose a special
session for this particular issue because of the time frame facing
Alaska in getting this gas into the world market.
REPRESENTATIVE BARNES pointed out there was a big difference
between gas and oil. "In the form of oil, you can go to the spot
market and sell oil," she explained. "With gas, you cannot. Gas,
... because it's a very specific the way it's sold, you have to
have contracts in place. And before the buyers of this product
which we have to sell will commit to signed contracts themselves,
they have to understand that there is a long-term fiscal control,
that they won't sign these contracts one day and have them jacked
up to where they couldn't afford to buy any longer."
Number 0400
REPRESENTATIVE JOE RYAN mentioned a natural gas pipeline through
Canada proposed some years earlier. He believed methane was the
only thing required to be delivered at that time. He noted
certain components were used for the manufacture of plastics. "And
somewhere along the line those things were disappearing because
they were coming from Prudhoe, but methane was all that was going
to be delivered in Minneapolis," Representative Ryan said. He
asked what would happen to those same products. He further asked
whether Alaska would get its royalty share of those under the
proposed scenario.
REPRESENTATIVE BARNES said she had a vague recollection of the
Canadian route for the pipeline. She did recall that the cost of
that pipeline was so prohibitive that they were asking the state of
Alaska to invest something like $25 billion into the project. "It
was an atrocious amount," she said. Representative Barnes did not
remember the details of "how the gas broke down" but offered to get
that information for Representative Ryan.
REPRESENTATIVE BARNES thanked the two committees for their
expeditious handling of CSHRC 1(WTR).
Number 0429
JOHN T. SHIVELY, Commissioner, Department of Natural Resources
(DNR), came forward to testify. He indicated Wilson Condon,
Commissioner of the Department of Revenue, was the more appropriate
commissioner to speak; however, Mr. Condon was either on his way to
Calgary or already there working on this project.
COMMISSIONER SHIVELY said the Administration supported CSHRC 1(WTR)
and recommended its adoption. He commended Representative Barnes
and the other members of the task force for their work over the
interim. The project required a great deal of cooperation among
the legislature, the Administration, the producers, the permit
holders, perhaps the buyers and a variety of other people, he said.
The Administration wanted to continue the good relationship they
had with the work group.
COMMISSIONER SHIVELY stated, "This is a very important project for
Alaska. I think that when we started this project, particularly
Commissioner Condon was very skeptical of the economics. And at
this point I must say that I don't think anyone has shown that the
economics are there to build this. The opportunity is there; there
is no question that there is a market opportunity. There is a lot
of debate, and you'll hear some of this, probably, from the
producers, about whether we have a window or a door. And at this
point, I'm not prepared to make a comment on that one way or the
other."
Number 0454
COMMISSIONER SHIVELY believed it was clear the opportunity would
begin around the year 2005. "It is also clear that there are other
competing projects within all three of the major producers, some of
which may not be actually be able to compete with even our
difficult economics," he said. The marketplace needed the gas and
understood that, he said. Japan really drove the market at this
point, and Commissioner Shively believed it would continue to do so
in the foreseeable future. "Of course, it is ... in their interest
to encourage as many projects as possible, because that just drives
their costs down," he added.
Number 0464
COMMISSIONER SHIVELY said the risk was more with the investors in
the line than with the buyers, who would probably sign a contract
with price provisions and know what they were going to pay. The
question was whether the investors, at that price, could get their
investment back and make a profit. This was driven by several
issues, including the project's actual cost and the selling price
of the gas. There were other, more subtle issues such as the
state's take, how it would come and whether it should be changed.
COMMISSIONER SHIVELY believed everyone agreed upon the importance
to the project of a long-term, stable fiscal climate. "And I think
the method that we've discussed is similar to what Representative
Barnes talked about, which is getting authority to negotiate a
long-term contract and then to bring that back to the legislature
for adoption," he said.
Number 0480
COMMISSIONER SHIVELY indicated there were two issues the
legislature should be aware of. "It is one thing to basically
enshrine in a long-term contract the fiscal situation as it
presently exists today," he stated. "And if that is our task, we
probably can do that. If, on the other hand, part of the
negotiations involves a change in the state fiscal regime, those
changes need to relate to the economics of the project."
COMMISSIONER SHIVELY advised that the economics of the project were
related to issues he had raised earlier. "[W]e would not be in a
position right now to say that some of those changes were needed,"
he said. "We've identified one, for instance, that we know has a
very positive impact on the economics, and that is not having an ad
valorem tax during the construction phase, not collecting that
until the project actually produces revenue. However, I think
there are certain communities in the state that might not see that
as ... part of the participation that they wanted to make."
Commissioner Shively said despite difficult issues, this was an
important project. He commended Representative Barnes for her work
and the legislature for their interest, emphasizing this would have
to be a cooperative effort.
Number 0498
CO-CHAIRMAN OGAN agreed and said he was encouraged by the increased
awareness and cooperation. He believed the progress had been
significant since the issue was brought forth the previous year.
CHAIRMAN MARK HODGINS referred to the unit on the North Slope that
encompassed the gas, noting there were several producers within
that unit. He asked Commissioner Shively, "If one producer decides
not to become involved with this, what happens ... to the gas? Is
there a way of purchasing that gas ...?"
Number 0513
COMMISSIONER SHIVELY replied there were two issues: the people
that want to invest in the project and whether or not those
investors will want to make sure there's a direct sale. "I'm not
sure that all three producers necessarily have to be investors," he
said. "If there was a market and there was a return on the
resource, I think a producer, whether or not they were a investor,
might just want to sell their gas into the project, just as there
are oil producers ... on the North Slope who don't own a piece of
the oil pipeline but yet sell their oil."
COMMISSIONER SHIVELY cautioned he was not familiar enough with the
economics of the project to say what would happen if one producer
withheld all of its gas for another purpose. He understood it
could probably be accomplished with two of the three producers,
plus the state, which was the fourth largest owner of gas there
because of its 12-1/2 percent royalty interest.
Number 0528
REPRESENTATIVE BUNDE asked for clarification. He further asked
whether the Administration's position was that the window of
opportunity existed.
COMMISSIONER SHIVELY replied, "The way I put it, I think, was we
agree that the opportunity exists starting in the year 2005.
Representative Barnes and others are very committed to `if we don't
get in at that time, no matter what the long-term situation is, we
will lose any opportunity to sell the gas.' I do not believe that
the Administration has come quite that far at this point, to be
frank. But we do realize that there is that opportunity in the
year 2005."
Number 0538
REPRESENTATIVE BUNDE referred to Commissioner Shively's use of the
term "enshrine" in discussing a stable financial atmosphere. He
also referred to the need for flexibility as things changed.
Representative Bunde asked whether the Administration anticipated
a change in tax policy regarding Alaska's gas.
COMMISSIONER SHIVELY responded, "We are just completing a study
done by Pedro Van Meurs, who is a well-known international
consultant out of Calgary. Actually, the reason Commissioner
Condon is not here is he's over talking about the first draft of
that study to get it finalized. That study will look at our fiscal
regime, compare it to our international competitors and make
certain recommendations to us. Some of those recommendations could
well result in a look at changing our fiscal structure, but until
we get that report, I'm not prepared to comment. But at this
point, we have not made any definitive decision that we need to
change our current fiscal regime."
Number 0556
REPRESENTATIVE RYAN asked whether Commissioner Shively was familiar
with the Arctic coal transportation study done two or three years
ago.
COMMISSIONER SHIVELY replied he knew there was a study done.
REPRESENTATIVE RYAN said it was a 300-page study, mostly a rehash
of old studies on railroad infrastructure. "But there was a
portion of it that delineated specific energy markets along the
Pacific Rim," he stated. "It told exactly which industries it
would be for, and they were talking about ... from 100 million
metric tons to 300 [million] by the year 2020." Representative
Ryan asked whether that same market, instead of using coal, could
change over to natural gas.
Number 0566
COMMISSIONER SHIVELY answered, "Countries, particularly Japan,
manage what sources they get their energy from, and Japan gets it
from a variety including nuclear, LNG and coal." He agreed there
was the ability, particularly in a country like Japan that had a
relatively managed economy, for a change in thought from ten years
ago to today. He understood that the Japanese government
originally had thought nuclear power would make up a fair amount of
the opportunity for growth in the economy. However, nuclear power
in Japan, as with other places, had become fairly controversial.
One reason, although not the only one, for an increased potential
for LNG was the possibility of substitution there. Commissioner
Shively explained, "I'm not aware of what they're doing in terms of
looking at LNG and coal. Because you have to have processing
facilities and different burning facilities, ... particularly for
energy production, you have to make those decisions fairly far in
advance."
Number 0583
REPRESENTATIVE ROKEBERG referred to Commissioner Shively's
indication there were two primary issues the legislature should be
aware of. "And one was basically, as I recall, basically what
should be the fiscal positioning of the State of Alaska," he said.
"But it was tied to the economics of the project, and I think part
of that, the economics of the project, will require at least phase
2 conceptual engineering and further development on the part of the
engineering side of the project to determine economics. This looks
like it's kind of a chicken-and-egg-type of a situation. And I've
got some concerns about that in terms of meeting some time frames.
Given that type of a background, ... what do you contemplate as a
reasonable time frame to respond to the legislature, based on the
request made in this resolution?"
COMMISSIONER SHIVELY responded, "We do not have a time frame right
now. As I said, if what people want is to enshrine our current
fiscal regime by contract, we might be able to do that in a
relatively short time frame. If what people are interested in is
making changes in the official -- in our fiscal regime, based on
the economics of the project, I would concur with you that we need
the next step in engineering and in fiscal analysis in order to
come back to the legislature and make a recommendation to do that.
I do not believe that you would see that this session. I believe
the earliest you could possibly see it would be next (indisc.)."
Number 0604
REPRESENTATIVE BEVERLY MASEK asked, "With the Venetie court ruling
on the issue of sovereignty, tribal sovereignty, I wonder if the
Department of Law might be able to answer this question on how it
would affect investors if ... the case with the Venetie issue is --
I know what the ramifications would be, but as far as ... the
tribal land, if this issue is resolved at the higher court level,
and what the relationship would be at the state level in dealing
with the Native organizations that are wanting to have tribal
sovereignty, how would this affect the project? You may not be
able to answer it, but I'd like to get some type of a response from
the Administration on this issue."
COMMISSIONER SHIVELY replied, "I can give you an initial response,
and that is that, interestingly enough, at the same time they
decided for Venetie, as you may recall, they decided against Copper
Center's ability to tax the oil pipeline because they say Congress
had specifically designated that as federal use land. And I think
if we stay within that corridor, and/or if it was changed off of
lands that at least are village corporation lands, which is where
the Venetie case sits now, it would not be an issue. If there was
some change in that, it could be in this whole issue of taxing
jurisdiction. Whether there's dual jurisdiction or whether the
tribal governments have (indisc.) taxing jurisdiction is something
that I have not looked into. There certainly is a great deal of
national law about it because `Indian country' exists in a number
of states, and all of them, I believe, have had to address that
kind of situation."
CO-CHAIRMAN OGAN asked if there were further questions of
Commissioner Shively. He noted that Representative Green had
joined the meeting. He then called upon David Lawrence to testify.
Number 0636
DAVID LAWRENCE, Gas Commercialization and Marketing Manager, ARCO
Alaska, Inc., stated he had two purposes. The first was to
indicate ARCO's support for the resolution and to thank
Representative Barnes for her work. The second was to provide a
brief overview of what he called "some of ARCO's learnings from the
Far Eastern LNG market."
MR. LAWRENCE stated, "ARCO has made many trips to the Far East over
the past few years, and especially over the last 12 months. And
most recently, in November, we visited Japan and Korea with BP and
Exxon and the Governor and his trade mission. In addition, we have
for many years had a permanent representative in Tokyo, Mr. Takao
Enomoto, who maintains our day-to-day marketing effort and contacts
with all the major LNG buyers in the Far East.
"When we visit the market, we typically meet as many of the
potential buyers and trading houses as possible, and especially
those buyers who we would classify as the large buyers of LNG. And
here I'm talking about the major utility companies in Japan and
Korea and Taiwan, and especially the power utility companies.
Naturally, these meetings are given some importance by the
potential buyers, because when we go to the Far East, we can
actually demonstrate that we do have gas to sell. Our gas is a
proven reserve from Prudhoe Bay, and that's very important for the
buyers to recognize. They also acknowledge that when they talk to
our company, and I guess some of the other ... potential producers
of North Slope gas, they're talking to companies with financial
strength and experience, and they could be credible project
sponsors for an Alaska North Slope gas project.
"Potential buyers in the Far East consistently say that they want
to see three characteristics in a viable LNG project. The first of
these is that the gas supply must be assured for the total life of
the contract. And we're fortunate in that regard because in
Alaska, where our gas resources have already been identified, this
is not a major concern.
"Secondly, they tell us that they want the project's commercial
structure to be clear and strong and recognizable to them. Now,
strong means having participating companies with financial strength
and without any conflicts of interest. And both buyers and
potential bankers for the project need to have confidence that the
project sponsors can pull the deal together. As we've indicated
many times in the past, developing a commercial structure of this
type is one of the major activities that our company is now engaged
in.
"Thirdly, on the buyers' interests, we find that the buyers do want
to understand in depth, and I really do mean in depth, that the
project is economically viable in a competitive market, at
competitive market prices. In our market visits, we find that the
large buyers are especially sophisticated and do have real
knowledge about our project costs and how we need to reduce them.
I can't emphasize that too much. We find them a particularly well-
informed group of people to talk to. The buyers also recognize,
and are concerned from time to time, that we have, sitting behind
our project, a fiscal and regulatory environment that is stable and
appropriate for the project. As again, I think you're all aware,
our work activities have been focusing both on project costs, and
recognizing the need to reduce them, and on appropriate fiscal
terms for the project."
TAPE 97-4, SIDE B
Number 0006
MR. LAWRENCE noted that Alaska had some expensive facilities that
needed to be kept at maximum utilization. He believed desire on
the part of the buyer was the beginning of a natural commercial
negotiation that would be expected on any gas project. He
expressed confidence that solutions could be developed through
cooperation and a dialogue with the buyers.
MR. LAWRENCE stated, "It's also clear that the buyers do not see
premium prices for Alaskan gas. They tell us this every time we
meet them. They readily acknowledge the benefits of us knowing our
gas resources, a stable political context, improving balance of
trade with the U.S.A., and the fact that the project will have,
potentially, some strong sponsors." However, none of these
factors, either individually or together, would be significant
enough to attract any premium to the price, Mr. Lawrence stated.
"There's just too much supply competition out there for us to
expect a premium price or any special contract terms. But again,
I suspect that this is the start of a negotiation, and that is
something which we will have to work on with the buyers in the
context of our ongoing discussions with them."
Number 0038
MR. LAWRENCE continued: "The buyers have told us recently that
they believe that from about 1998 onwards, they will need to engage
in serious discussions and negotiations to secure supplies for the
2005-to-2010 period. Now in the one sense, we shouldn't expect,
then, to see too many new market developments this year with the
buyers. But I'd quickly say, though, that we do plan to continue
our regular marketing activities in order to build up the necessary
long-term relationships that we will have to have to get a project
of this size off the ground, and perhaps importantly as well, to
exchange all the relevant data with the buyers, to ensure that we
are well-placed to start more detailed discussions with them when
they are ready to do so.
"Finally, all demand projections that we certainly are aware of do
show continued growth in the demand for LNG in the Far East over
the period we're talking about, although there are some
uncertainties country-by-country. For example, LNG demand will,
and we just heard about this in the discussion with Commissioner
Shively, LNG demand will be affected by coal and nuclear power
plant construction and retirements, and also, perhaps, by the
evolution of new, independent power projects. Also, deregulation,
particularly in Korea and Taiwan, of the utility companies will
have a major bearing on their ability to move swiftly and to commit
to gas from our project. There's also an important issue which is
under debate, particularly in the Far East, over the level of
carbon dioxide emissions that those countries will be allowed to
have over forthcoming years, and this will have a bearing on the
type of fuel that they are allowed to burn in the future."
Number 0079
MR. LAWRENCE concluded by saying ARCO's market visits have been
very productive and were always well-received. They intended to
continue these visits throughout 1997, and they hoped to make their
next trip to Tokyo in the next few weeks. Mr. Lawrence offered to
provide additional details or answer questions.
Number 0097
CO-CHAIRMAN OGAN asked whether ARCO was comfortable with the
memorandum of understanding as written.
MR. LAWRENCE answered, "Yes, we are. We are comfortable with the
memorandum of understanding, subject to a final review of the
actual version provided to us."
Number 0105
CO-CHAIRMAN OGAN asked whether Mr. Lawrence had seen the state's
financial model referenced on page 6 of the memorandum of
understanding.
MR. LAWRENCE said yes, they were familiar with that.
CO-CHAIRMAN OGAN asked if the model was adequate. He further asked
whether Mr. Lawrence or another ARCO representative had personally
looked at the model or worked with it.
MR. LAWRENCE responded, "We have, over the last few months, had the
opportunity to work closely with the Department of Revenue on the
construction of that model. We maintain our own model, which is
obviously slightly different, but we do find that the state's model
provides similar results to the modeling that we would be using.
In that sense, yes, it is ... adequate for its purpose."
Number 0122
CO-CHAIRMAN OGAN referred to language regarding dispute settlement
procedures on page 9 of the memorandum of understanding. He asked,
"Has there been any negotiations as far as how any disputes may be
resolved? And when do you think that might be in place?"
MR. LAWRENCE replied, "I'm not aware of any discussions that have
taken place. I'm sure it's a subject which will need to be
discussed, but again, I'm not aware of any plans to have those
discussions."
Number 0133
CO-CHAIRMAN OGAN referred to page 12 of the memorandum of
understanding and noted there was language indicating at an
appropriate time, ARCO would evaluate YPC's existing work. He
asked Mr. Lawrence, "When do you anticipate the appropriate time
would be? What do you have to do to get there, I guess?"
Number 0141
MR. LAWRENCE replied, "I guess we have to do sufficient work
ourselves to be able to understand the value of those permits to
the project as we see it. That work is in progress at the moment.
And I'm hopeful that we'll be at that point as soon as possible."
CO-CHAIRMAN OGAN asked Mr. Lawrence to speculate on what "as soon
as possible" might be, whether it was six months, a year, or how
long.
Number 0150
MR. LAWRENCE stated, "We've got an ongoing work program at the
moment, which is focused -- focuses, as I mentioned earlier, on
finding the best ways to get the cost reduced, look at the fiscal
system for the project, the marketing activities, and (indisc.) the
commercial arrangements for the project. Permitting for us is not
on that critical path. It is part of our general technical review
of the project. And in that sense, I think that we will be focused
on our four main activities first, before we spend a significant
amount of time investigating where the permits fit into things."
Number 0161
REPRESENTATIVE RYAN expressed interest in a market that seemed to
be left out, the People's Republic of China, which had a birth rate
of 14 to 15 percent a year. He asked whether it was lack of
infrastructure or other factors that made entering that market
prohibitive. Representative Ryan believed China had tremendous
energy needs and said, "1.2 billion people seems like a pretty nice
market."
Number 0173
MR. LAWRENCE responded, "Yes, I do believe that the Chinese market
is a potential market for this project. As you allude there, the
Chinese infrastructure is nowhere near as well-developed as in the
other three countries which I mentioned, Japan, Korea and Taiwan.
They already have regassification facilities, ports for receiving
LNG, gas pipeline transmission networks, gassified power plants.
They all exist in those three countries. So in that sense, they
are the natural markets that you would look to, to move this
project forward quickly. There's no doubt ... the Chinese market
could be a potential market for this gas, but it's going to need
significant development, both on their side and on ours, to
actually find a home for our gas there. So in my mind, it is
definitely a potential market, but it's not perhaps the first one
that you would look to if you're trying to move the project forward
quickly."
Number 0193
REPRESENTATIVE J. ALLEN KEMPLEN referred to Mr. Lawrence's
indication that buyers were extremely well-informed about natural
gas projects. He asked Mr. Lawrence to elaborate on the buyers'
perceptions of the true costs and what they feel needs to be done
to make this project viable.
Number 0202
MR. LAWRENCE responded, "The buyers are sophisticated. They
monitor events in Alaska extremely closely. And I'm sure that the
hearing today will find its way back into Tokyo probably by the end
of today or tomorrow. They follow things very, very closely, which
is a good indication that they are very seriously interested in
this project.
"They maintain all their own cost-estimating models and their own
economic analyses for all the projects that they would potentially
buy from. They need to do that, obviously, to make sure that they
are getting ... the best deal that they possibly can, obviously.
They obviously take a view on the Alaskan project that we have some
extensive infrastructure that can be utilized for this project, and
so it is very good, and we have proven reserves, which is very
good.
"But they also see the difficulties ahead of us of building the new
pipeline across Alaska. And that is ... one of the things which we
have to do which none of the other projects that they're looking at
have to do. So there is a disadvantage. And so they look to us to
provide them with information on the pipeline, demonstrate to them
how it will be constructed and how it will be done efficiently, and
how ultimately we are going to be able to guarantee deliveries to
them in a timely fashion. So it's a confidence-building exercise
as much as anything else."
Number 0230
REPRESENTATIVE KEMPLEN expressed his understanding that it was not
a question of facilities at the beginning of the process, nor
facilities in Valdez at the end of the pipeline, nor the fleet to
transport the material, but rather the pipeline itself that was the
major sticking point for the buyers.
Number 0239
MR. LAWRENCE responded, "I think that it is, in a way, because the
other facilities that we will need to build are not unique to ...
Alaska. They're the sort of things that probably ... all the other
LNG projects around the world are having to do. So the pipeline
makes us unique.
"I think the other thing that makes us unique is the scale of our
project, as well. It is much bigger than any of the other projects
that they're looking at. And what they will have to do is they
will have to make tremendous investments themselves in order to be
able to absorb our gas into their market, new gassification
facilities, new transmission pipelines, certainly new power
stations. They will have to invest very nearly as much as we will,
and they have to do it over a similar sort of planning period and
a similar sort of time, as well.
"So it's very important that we do communicate with them and work
closely with them, because we're going to have to recognize that
they have almost as much work to do as we do, which is why they
will look very, very closely at us to determine the confidence that
they have, or that they need to have in us, and us in them, in
order to be able to bring the project together."
Number 0257
CO-CHAIRMAN OGAN noted that Representative Kubina was present and
invited him to join the committees at the table.
REPRESENTATIVE BUNDE referred to Mr. Lawrence's statement that the
buyers are very aware of what is happening in Alaska. He asked Mr.
Lawrence to speculate on the impact of the resolution in the buyer
community.
Number 0295
MR. LAWRENCE responded, "I would like to speculate on that, because
I think that's very important, a very important point that you
raise. The market is very well-informed. The buyers are very
well-informed. They manage to get copies of the Anchorage Daily
News almost as quickly as I do at home. It's surprising. And I
think that the concept of the MOU and the resolution will help
significantly in building confidence in the marketplace that Alaska
is very serious about this project, and the people of Alaska and
the legislature of Alaska and the oil companies are very serious
about this project. And it will help tremendously in my
discussions, certainly, when I go to meet with them. So, yes, yes,
I would like to speculate. And ... I hope it will help the project
greatly."
Number 0286
REPRESENTATIVE BUNDE referred to Mr. Lawrence's mention of
continued demand and the notion of a window of opportunity. He
asked whether historically the price of gas had risen. He also
asked Mr. Lawrence to speculate whether, not just in five or ten
years but in fifty, the demand for Alaska's gas would continue to
escalate.
Number 0295
MR. LAWRENCE responded, "That's a much more difficult area to
speculate on. And in fact, if I could speculate on price, I
probably wouldn't be sitting here today. I think that we're
looking at countries ... with natural economic demand. And that is
reflected in their fuel purchasing needs. Japan is a mature
economy, and so the rate of growth in demand in that country will
be less than in Korea and Taiwan. And certainly, as we've already
acknowledge, the market in China is a huge potential, untapped
market for LNG.
"I think there are other pressures, as well, which include
environmental pressures towards burning cleaner fuels, which again
will help the demand for LNG and gas in those markets. And we also
see some pressures in those countries, particularly in Japan,
related to ... their ability to construct plants, electricity
plants, of other types. Nuclear and coal and oil are becoming
increasingly difficult for them to construct, whereas gas plants,
having a smaller footprint, being able to be built a little faster,
and of course producing less emissions, are perhaps going to ...
make gas the fuel of choice in those countries. So I'm hopeful
that the demand will grow, but it is also subject to natural
economic, world economic changes, as well."
Number 0321
REPRESENTATIVE ROKEBERG asked, "Of the number of competing LNG
projects contemplated, which ones do you look at as the biggest
threat to the ability to move LNG gas? And then secondly, without
going into great detail, what impact do you believe the Japanese
economy, which basically has been in recession for a number of
years, is going to have on the ability to market the gas to
(indisc.)?"
Number 0330
MR. LAWRENCE replied, "I think the Alaskan project is characterized
by its size. And in that sense, you probably do have to look at
its natural competitors as being the other very large gas resources
which are within reasonable shipping distance of the markets that
we're talking about. I introduced the concept of reasonable
shipping distance because the Middle Eastern markets and the big
gas fields in the Middle East are at a significant disadvantage to
us in terms of extra ... shipping distance. And so that should
give us ... some help.
"Any large gas accumulation which is within a similar shipping
distance as Alaska is a potential competitor to this, particularly
when we look at the very large-scale projects. And the large-scale
ones that naturally form into that category are Sakhalin and
Natuna.
"Your second question was on the Japanese economy. And I think the
Japanese economy ... has been in recession, as far as I understand
it. I sense that it is moving slowly ... out of recession. Again,
it's one of those areas of speculation and crystal-ball gazing, and
I'm ... not an international economist in that sense. But I think
all our projections do show steady if not spectacular growth in the
Japanese economy over the next 10-to-15 years."
Number 0356
REPRESENTATIVE RYAN referred to Mr. Lawrence's indication that
large buyers would have certain developmental infrastructure costs
coinciding with Alaska's. He asked whether, to sweeten the pie,
anyone had proposed to joint venture.
MR. LAWRENCE replied no, he had not heard of those suggestions. On
the other hand, he had heard suggestions that perhaps some larger
Japanese, Korean and Taiwan companies might look to be potential
investors or sponsors of an Alaskan project, alongside companies
like ARCO. However, ARCO had not yet come across any examples of
joint venturing at the market end.
Number 0369
REPRESENTATIVE RYAN commented, "There's a long, 2000-year history
of Far East dealings where they become your partner and then they
become your owner."
Number 0373
CHAIRMAN HODGINS indicated he would ask his question of all the
producers. He asked whether Mr. Lawrence foresaw this project
going forward if one or two other major producers did not become
investors, and whether it would be possible to put other investors
together to keep the project on-line.
Number 0380
MR. LAWRENCE replied, "I think the structure of the project is one
which will clearly bear a lot of investigation and a lot of
discussion over the next few months. I believe it is possible ...
to put together an Alaskan project in many different ways. And we
know that there are many potential people out there who could
become investors in the downstream part of the project, which is
clearly the part of the project that we don't have at the moment.
"We have an upstream part of the project. We have a, really an
existing Prudhoe Bay field, an infrastructure to produce gas. It's
the downstream part of the project that we're talking about. And
in that sense, ... I believe there are many potential sponsors of
a downstream part of the project. Clearly, that downstream project
will require gas and require gas to ... be supplied from the North
Slope. And I'm hopeful that ... the North Slope producers will
want to supply gas into that project."
Number 0396
CO-CHAIRMAN OGAN advised there were three more producers wishing to
testify in the remaining 45 minutes. He called on Mark Bendersky
to testify.
Number 0402
MARK BENDERSKY, Commercial Manager for Gas, BP Exploration (Alaska)
Inc., thanked Representative Barnes and the task force for their
good work over the interim. Mr. Bendersky stated that BP supports
the resolution and then offered to answer questions.
Number 0415
REPRESENTATIVE BUNDE said, "You mentioned that you support the
resolution, and that includes the resolve that recognizes a window
of opportunity. You're endorsing that it's important that we
function within that window?"
Number 0424
MR. BENDERSKY replied, "We agree that there will be market demand
starting around the year 2005 for new suppliers into the market.
And 2005 is an excellent goal to shoot for. However, it is a ...
buyers' market. There are a lot of suppliers. Some of them have
smaller projects. Some of the projects may be more cost-effective.
So we are working very hard to do our best to make Alaskan gas as
(indisc.) as possible. And there will probably be new contracts
let beginning in 2005.
"We don't see, however, that if we are not the very first supplier
in the market, that we're going to be shut out for a particularly
long time. The market has told us that they welcome Alaska gas.
They desire it very much for purposes of supply diversification.
And should we come to them with an economic project, they're going
to be very interested in buying our gas."
Number 0442
REPRESENTATIVE BUNDE indicated he had heard concern about smaller
fields that might come on-line, precluding Alaska's entry into the
market. He asked, "Is there some other economics that come into
play here, some dynamics, where we have such a huge supply? ...
[C]an we offer a volume discount and then perhaps capture more of
a market than the smaller fields that would not have the immense
amount of gas that we have to supply? I'm not suggesting you sell
your gas any cheaper. I'm just saying that, are there counter-
balancing arguments here?"
Number 0442
MR. BENDERSKY replied, "The advantage smaller fields have are they
can line up a smaller amount of buyers to arrange the volume and
the timing and ... find a happy medium. ... We have a tremendous
marketing challenge because we'll be bringing on board, once we get
to our plateau, almost twice, 14 million tons, almost twice what
any other project has ever done. So we're probably looking at ...
at least two countries and I don't know how many buyers, but
they'll be numerous. And our challenge will be to work with the
buyers so that their new construction and all of their lead-time
work all comes together, orchestrated, so that when ... our ships
... land in their ports, they're ready. ... All the timing has to
match because their investments and our investments are huge."
Number 0469
REPRESENTATIVE KEMPLEN referred to Mr. Lawrence's mention that the
pipeline itself was the big cost. He asked Mr. Bendersky what in
the pipeline construction was the major cost issue. He speculated
the issue might be materials having to come from American
manufacturers, the Arctic and sub-Arctic environments, or labor
costs.
Number 0480
MR. BENDERSKY said the major cost issue with the pipeline was the
installation cost, not so much the cost of the pipe itself. He
believed, based on the TAPS project, it could be accomplished in a
smarter way and less expensively. The cost estimate of the
pipeline was what made the project currently uneconomic, he
explained. They needed to amortize all costs, including the
conditioning plant, pipeline, liquefaction and ships, over all of
the gas. It was that extra pipeline component that really hurt the
economics, particularly since the pipeline needed to be installed
up-front.
Number 0498
REPRESENTATIVE RYAN said, "I've been told by those folks with whom
I deal in the oil industry that the Saudis can produce their light
crude and deliver it anywhere in the world for $3 a barrel, and yet
it costs us $10 or $12 from Alaska .... They have a very
competitive advantage on us. It would seem to me that if they
could produce this oil and deliver it at that price, the gas should
be comparable. I've also been told by most people I know in the
oil industry that if there ever becomes a real market for gas, the
Saudis have all the gas in the world."
REPRESENTATIVE RYAN continued, "Now, according to the shipping
schedules and that little diagram [that] was there, they have
perhaps twice as far to ship as we do, to reach the same markets.
But considering their advantage on their cost and production, it
would seem they could still ship and deliver a heck of a lot
cheaper than we can." He asked whether his assumption was correct.
Number 0511
MR. BENDERSKY replied, "My understanding is that new projects
coming on-line in the Middle East, the LNG projects, ... are coming
on and they're economic. ... They're getting bank financing. And
it is true if those projects can use some of the existing
infrastructure that's there, like ports, that expansions of those
projects will even be more economic. But the way gas is priced has
not been so much based on the cost of production of gas. It has to
do with the link to the price of oil delivered in the market. So
there are price formulas that, as oil prices go up and down, LNG
prices have tracked them. So people are trying to get as much
revenue as possible for their product. It is possible for Middle
Eastern suppliers to undercut us on price if they wished, just like
they could do on oil right now. But we're hopeful that because of
the buyers' desire for supply diversification, that gives us our
best hope and chance for making an Alaskan gas project happen."
Number 0536
CO-CHAIRMAN OGAN pointed out the stable political climate existing
in the United States as compared to parts of the Middle East.
Number 0541
REPRESENTATIVE ROKEBERG asked, "Within BP do you have a counterpart
that's in Papua New Guinea and Canberra, Australia, doing the same
thing you're doing?"
MR. BENDERSKY replied, "Yes. BP is in the LNG business. We have
working interests in both Abu Dhabi and in the northwest shelf of
Australia. Both of those projects have been expanded already, and
we are ... hopeful that we'll be expanding our northwest shelf
project another time. We have representative offices in mainland
China, Korea, Taiwan and Tokyo. We've been in the business ...
over 20 years. And everyone is trying to ... progress their own
projects."
Number 0557
REPRESENTATIVE ROKEBERG asked whether those projects were offshore.
He further asked, "And also, where are they in terms of their
development in their time lines, as juxtaposed to TAGS' line?"
MR. BENDERSKY responded, "The northwest shelf project, which is
operated by Woodside (ph) Petroleum, is an offshore project, and
the expansion of that project could be in the 2003-to-2005 time
frame for deliveries, ... based on press reports. We have another
gas discovery in Papua New Guinea. The two largest working-
interest owners are BP and Exxon. The discovery is in the central
part of the island, very mountainous, and ... I would have to
characterize it as -- that more appraisal drilling is required
before sufficient reserves are confirmed to have a project. That
project has ... a lot of challenges ahead of it, reserves and the
whole gamut of challenges."
REPRESENTATIVE ROKEBERG asked, "Well, is the Australian project in
production of LNG now ...?"
MR. BENDERSKY replied yes, he believed it had been going 20 years.
It was producing 7 to 7.5 tons per year. "I believe it has eight
ships serving primarily Japan," he said.
Number 0581
CO-CHAIRMAN OGAN referred to page 12 of the memorandum of
understanding, the language regarding the appropriate time to
evaluate YPC's existing work to determine whether or not it was
something BP wanted to work into their plan. He asked, "Can you
speculate on when that appropriate time would be and what you have
to do to get there?"
Number 0586
MR. BENDERSKY replied, "YPC has done an excellent job in getting
its permits, which are specific to the existing right-of-way
corridor. YPC has done an excellent job of putting their
information into the public domain. We have been and will continue
to evaluate the information that they have put in the public
domain. They've made it very easy for anyone to do that; so I'd
like to commend them."
MR. BENDERSKY continued, "For us, the important thing to make this
project a reality is to get hold of our -- you know, one important
thing is to get hold of our costs, our capital costs, our operating
costs, our taxes. And in getting hold of our costs, we're going to
have to define what the specific project is, what makes the most
cost sense. And once we're at that point, we will then be looking
for what's the most cost-efficient way to get that specific project
permitted. And we'll take that most cost-efficient path. ... I
can't predict when we'll know when the specific project is defined.
But that's the path we're going to be taking."
Number 0623
CO-CHAIRMAN OGAN referred to the Limitations section on page 13 of
the memorandum of understanding. He asked, "Hopefully you won't
get there, but if you get to the point that you can't agree and
that this is not something that BP wants to invest in, would you be
willing to ... sell the gas at a well-head price?"
Number 0612
MR. BENDERSKY replied, "I believe so, yes. ... We won't stand in
the way of this project. ... We are interested in having as high a
well-head price as possible. That's good for both the state and
us. And we haven't made any decisions on whether we're going to be
a downstream player or not, but we're certainly studying that very,
very hard. And one of the earlier questions was ... if one party
doesn't want to sell his gas, could that prevent the project from
going ahead. And we believe that there's certainly enough gas that
if two parties and the state wanted to go ahead, that it could
certainly go ahead."
CO-CHAIRMAN OGAN asked if anyone else had BP-specific questions.
He thanked Mr. Bendersky for his time and then called on Beverly
Mentzer to testify.
Number 0625
BEVERLY MENTZER, Manager, Business Development, Natural Gas
Department, Exxon Company, U.S.A., thanked the task force for their
work during the interim and on the soon-to-be-published report.
She also thanked the committees for their efforts in supporting
issues to help progress the project.
MS. MENTZER stated, "I'd like to first re-emphasize that Exxon is
very committed to commercializing Alaska's gas reserves on the
North Slope. Exxon has been involved in commercialization of the
gas reserves since the discovery of Prudhoe Bay in the '67-68 time
period. Since then, we've spent $90 million within our company
alone on looking at various options to develop the gas reserves,
and that time period focused quite a bit on pipeline transportation
options to the Lower 48.
"Since 1992, the producer studies have focused primarily on the LNG
export option, and from '92 through '96 jointly spent about $12
million in those efforts. Right now Exxon has over 40 people
working on various aspects of commercialization of an LNG export
project, and we're leading multiple teams in this joint effort.
"Exxon is strongly supportive of HCR 1. As pointed out in the
resolution, Alaska has abundant gas resources. Benefits to
Alaskans will include jobs and domestic natural gas supplies.
There is strong international competition to supply the Far East
LNG market. And we agree there appears to be an opportunity in the
marketplace, beginning around 2005, to begin placing new LNG
supplies in the market and that those opportunities will continue
to grow.
"The market has told us that an Alaska LNG project must be
economically viable at competitive prices. Also, to make
investment in a new LNG project viable, there must be long-term
contractual relationships established between facility owners, gas
buyers and purchasers, financial institutions and other
participants. So a major new commitment such as this must be
backed by a long-term, stable and appropriate fiscal and regulatory
regime.
"Therefore, consistent with this resolution, Exxon agrees that the
state should work to provide this stable and appropriate fiscal and
regulatory environment, to give a new Alaska LNG project the best
opportunity it can to become economically attractive to investors
and compete on the worldwide market with other LNG projects and
other competing fields. We look forward to working with the state
administration and legislature to develop a contract that sets out
those terms and are committed to pursuing that effort."
TAPE 97-5, SIDE A
Number 0001
REPRESENTATIVE BUNDE stated, "A while back, there was a
considerable concern about reinjection of gas, I think. Does it
still hold true that a barrel of oil is worth many times much more
than a cubic foot of gas to the State of Alaska, or whatever unit
we want to compare, that basically oil is far more valuable than
gas per unit, whatever the unit is?"
MS. MENTZER replied, "Uh-huh."
REPRESENTATIVE BUNDE asked, "And do you and other producers now
have some reasonable comfort levels that we are not jeopardizing
oil production by moving forward in gas production?"
Number 0022
MS. MENTZER responded, "It is true that oil, on a barrel basis, has
more value than gas, and the impact of gas development and sales on
recovery of oil reserves is included in the financial models that
are being developed. It's our objective as leaseholders of those
reserves to develop and optimize the entire hydrocarbon resource,
not oil or gas one at the benefit of the other. So we look at the
optimization of the whole, and looking at the impact on that, is it
-- it is in the economics, and the negative aspects of any deferred
oil recovery or changes in that are more than significantly
overwhelmed by the economic benefits of the LNG sales."
Number 0046
REPRESENTATIVE BUNDE said, "Well, that makes me just a little
nervous. I thought I heard you say that as long as there's money
to be made, you wouldn't let the through-put of the pipeline
decrease, and of course, at least for me, that scares me because
then we've got to tear up the pipeline." He asked if that was an
oversimplification of what Ms. Mentzer said, that as long as there
was a greater net gain financially, the through-put of the pipeline
would be allowed to decrease.
MS. MENTZER clarified, "The point I was trying to make is we want
to optimize the overall hydrocarbon recovery of the reservoir. And
whatever is the best answer to do that economically is what we want
to do. And in this case, the earlier you develop the gas reserves,
the more significant the impact it might have on estimate --
ultimate oil recovery. So there would be some decline if you look
at the ultimate end-life of the oil reserves by themselves, with
and without any gas sales. It is slightly lower with gas sales
than it is without."
Number 0074
REPRESENTATIVE BUNDE suggested that "the earlier we develop, then,
the sooner we reduce the through-put of the pipeline to the point
where the pipeline would have to be dismantled."
Number 0076
MS. MENTZER responded, "I don't know that you can take what I've
said and translate that into rate, because that relates to a lot of
reservoir mechanics as to the rate of decline. So in the end there
would be less oil. As to what the rate would be, I can't speak
specifically to that."
Number 0083
REPRESENTATIVE BUNDE said, "I've looked at oil and gas in the
ground as money in the bank. And again, putting on your crystal
ball, do you see the value of either that oil or gas diminishing in
the next hundred years? If we don't develop it tomorrow, is it
still, in 50 years, going to have value and perhaps increased
value?"
MS. MENTZER replied, "I really don't feel qualified to speak to
that."
Number 0099
REPRESENTATIVE BARNES stated, "I think it's important to clear the
record, because Beverly, correct if I'm wrong, but during the
process of selling the gas, because we have such a huge volume of
gas, that the gas would still be available, that that's not being
transported, to use to develop the oil. Would you comment on
that?"
Number 0110
MS. MENTZER agreed that was true and explained, "We are currently
reinjecting 7.5 billion cubic feet of gas per day and would plan to
take off for sales 2 billion cubic feet of that. So it does retain
value in pressure maintenance in the reservoir in aiding oil
recovery."
REPRESENTATIVE BARNES said, "And you're also using not just
strictly gas to raise the oil, but you're -- you call it
`minuscule' recovery, using both gas and water, is that not true?"
MS. MENTZER responded, "Yes, the miscible injectant ..."
REPRESENTATIVE BARNES said, "Yes."
MS. MENTZER continued, "... for enhanced oil recovery is being
used."
Number 0021
REPRESENTATIVE BARNES said, "And the value of the oil and gas
staying in the ground over the long term, don't you also have to
look to places like Russia and other countries which have huge
deposits of both oil and gas that stands to displace Alaska's gas
and make it fairly worthless if we are not able to market it in a
timely period?"
MS. MENTZER agreed and said, "You would look both at the price gas
might be selling on the market and the demand."
Number 0132
REPRESENTATIVE BUNDE stated, "But we haven't found that they're ...
producing any new gas and that -- it's a finite resource. And if
another country uses theirs up, and we still have some, ours will
still retain value."
MS. MENTZER replied, "Our gas would still retain value as long as
there's a purchaser willing to buy it at a reasonable market
price."
REPRESENTATIVE ROKEBERG suggested it was a bad economic idea to
bank hydrocarbons on the North Slope for the future generations of
Alaska.
REPRESENTATIVE BUNDE commented, "Your grandchildren might object."
Number 0155
CHAIRMAN HODGINS said to Ms. Mentzer, "I'd asked the other
producers about the role of maybe this project going forward with
one or two producers being involved in the investing of it." He
asked about Exxon's thoughts on that.
Number 0162
MS. MENTZER explained, "The current Prudhoe Bay agreements allow
for any gas owner to take their gas in-kind. And the agreements
have been developed to make the provision for a major gas sale. So
contractually it is possible for one, two or all three gas owners
to take their gas and proceed with the project. If you look at how
long that project could last, then you're looking at the gas
reserves in the ground. For example, three owners could sell gas
for 30 years, two owners for approximately 20 years. But there are
options available for gas to either be sold at the well-head or
producers to make individual decisions in regards to the options
available to commercialize the gas."
Number 0180
REPRESENTATIVE RYAN indicated he had heard about a well drilled
across the Colville River from Umiat that was capped; it
subsequently blew and burned. "And Mr. Adair (ph) from Texas had
to come up and put it out," he said. "And it was a natural gas
well and supposedly has tremendous reserves underneath it." He
asked whether Ms. Mentzer was aware of it and what the potential
might be for developing what was underneath those particular
reservoirs.
MS. MENTZER responded, "I'm not aware of that to comment, but I
will look into it."
Number 0192
REPRESENTATIVE ROKEBERG referred to the "potential conflict of
interest that arises internally within a corporation." He said,
"And I think Exxon is particularly subject to that scrutiny. So
what is your individual position? Are you solely responsible for
Alaskan gas or are you looking at ... other projects ... in the
purview or the scope of your employment? And then additionally, I
am really concerned about the major investments in the Sakhalin
Islands and Natuna, which ... are the obvious competing projects of
greatest concern."
Number 0205
MS. MENTZER responded, "Personally, my only responsibility is for
the development of the Alaskan gas reserves as an LNG project.
Also within my company, Exxon Company, U.S.A., it is the only LNG
project that we have to promote. All the other projects are in
Exxon Company International. And we have no priority (indisc.)
within the big company, Exxon Corporation, there is no
prioritization in any way of the worldwide LNG projects. Each
project has significant hurdles to overcome, and each project team
works the best they can to move their projects forward. And our
Alaska project needs to compete with those projects and all other
ones that are out there, even ones that none of the current
producers here may be involved in, to make our project the most
competitive when we take it to the market.
"In addressing your question specifically regarding Sakhalin and
Natuna, the Sakhalin project now, they have negotiated fiscal terms
with the government, and they're currently undergoing exploration.
It's a joint oil and gas field, and so there are issues as to, you
know, how those would be produced, sequentially or concurrently.
So there's a lot of work to be developed there.
"In the Natuna project, they have also established fiscal terms
with the government. The lead case right now [that] they're
looking at is a pipeline to Thailand to sell approximately half of
the reserves, still keeping LNG export (indisc. -- coughing) but
focusing on the pipeline-to-Thailand case right now."
Number 0238
REPRESENTATIVE ROKEBERG asked, "Do you have a marketing arm of your
folks in Asia, particularly, and Tokyo and Japan? And how ... can
your marketing people that are internationally involved separate
the various competing projects to help you push the TAGS line vis-
a-vis the other competing projects? How does that work?"
MS. MENTZER replied, "The way we utilize our marketing people in
the Far East, we use them primarily for intelligence gathering and
staying in touch with the market. When each project goes to
discuss specific terms, they're represented themselves in talking
to the market, as far as advancing their project."
CO-CHAIRMAN OGAN thanked Ms. Mentzer. He then called upon Wayne
Lewis to testify.
Number 0256
WAYNE LEWIS, Vice President, Yukon Pacific Corporation (YPC), noted
that YPC was a business unit of CSX Corporation, which was
headquartered in Richmond, Virginia. He stated, "As you know,
Yukon Pacific is sponsor of the Trans-Alaska Gas System or TAGS
project and together with CSX has been involved since 1986, a bit
earlier just as YPC, but with CSX since 1986, in moving this
project forward."
MR. LEWIS expressed appreciation for the opportunity to testify in
support of HCR 1. He noted that the previous week Jeff Lowenfels,
President and CEO of Yukon Pacific, had testified before the four-
member joint working group and the House Special Committee on World
Trade and State/Federal Regulations, both chaired by Representative
Barnes, discussing a number of issues relating to North Slope gas
and the evolution of the TAGS project.
MR. LEWIS said although Mr. Lowenfels was travelling back East and
could not be there that day, "he certainly joins me on behalf of
YPC and CSX in urging the two committees convened here today to
pass this resolution as amended, so that it may be considered ...
by the full House and the Senate. We also want to express our
sincere appreciation to the legislature, to Representative Barnes,
to the Administration, for the attention, and the level of
understanding that has resulted from that attention, that you've
devoted to this very critical issue. We look forward to working
with all of you and the North Slope producers as we continue to
advance this concept to reality."
Number 0298
REPRESENTATIVE BRICE noted the resolution states 14 million tons
per annum needed to be produced. He asked, "What is the capacity
of the pipeline itself? For a 42-inch pipeline 800 miles long,
what is the daily capacity?"
MR. LEWIS responded, "It's a function of compression. And in
essence you add more compression ... and you install capacity at
both ends of the line. But without getting into hydraulics, which
you don't want to hear from me on anyway, I promise you, because
I'm not expert, but essentially, a 42-inch line, as you add more
compression, can potentially go up ... an ultimate production level
of between 25 and 28 million metric tons of LNG per annum."
Number 320
REPRESENTATIVE BRICE asked, "What kind of impact is that going to
have on state revenues as well as the private sector? Well, for
you folks, in general."
MR. LEWIS replied, "Well, essentially, if you go up to those
volumes, in gross revenues, you double them from the 14 million
tons. In net revenues, however, the impact is enormous because you
have effectively, except for additional compression, paid for the
pipeline off the 14 million metric tons. So the expansion
economics of this project are probably unrivaled in the world."
Number 0332
CHAIRMAN HODGINS indicated he had three questions and said, "One is
I want to make certain that Yukon Pacific wants to be an investor
and an owner in the line. Two, I'd like to know the thoughts, and
very quickly, on a trunk line into Southcentral Alaska to help feed
the industry (indisc. -- coughing) Kenai, plus the domestic use in
Anchorage. And then one thing I haven't asked the other producers,
and I apologize for that, but I'm very, very interested in Alaska-
hire and having our training -- and if you could give us a quick
thought on that."
Number 0342
MR. LEWIS responded, "CSX, really since the inception of their
involvement in this project and certainly through Yukon Pacific,
has expressed in every possible forum we can, both public and
private, our desire to ... continue to be an investor in the
ultimate project structure. As to how that would actually be
defined, ... I just can't say because no one quite knows how that
will evolve. It will be a hybrid modeled after other projects.
Certainly it could include one or all of the North Slope producers,
Yukon Pacific as the permit holders, the buyers themselves
typically take an equity position in their own supply projects
together with trading companies. So we have, in a generic sense,
expressed that in the end, when the final equity mix is done, we
expect that, again depending on how it evolves, that CSX and Yukon
Pacific could own 10 to 25 percent of the ultimate project equity
mix.
"I think your second question related to Cook Inlet gas. We have
worked over the past couple of months with prospective users who
are now operating in Cook Inlet, prospective users who would enjoy
the benefit of a North Slope gas pipeline by taking off gas with a
new pipeline at Glenallen, bringing it down into the Wasilla area,
and tying into the existing Enstar infrastructure there, which
could ... in a backwards sense begin to supply all those users, not
only Enstar's users but ultimately Unocal and Phillips and others.
"The date we have been asked to consider is around 2004 or 2005.
The volumes are on the order of 300 million cubic feet per day, up
to 500 million cubic feet of gas a day. Now recall, at 14 million
metric tons we would essentially be bringing down about 2 billion
cubic feet of gas per day from the North Slope. Cook Inlet usage of
North Slope gas has a very positive effect on the ramp-up that we
talked about here and on project economics ... for the TAGS
projects. So we have been working on hydraulics and other concerns
that I'm, believe me, not expert enough to talk about. I'm just
saying configurations of what that might look like in terms of
pressure and composition of the supply taking off from Glenallen."
MR. LEWIS addressed training and Alaska-hire, saying, "We have had
a number of conversations with organized labor over a long period
of time regarding Alaska-hire. I have lived here, as has
Representative Rokeberg, since the beginning of time, basically.
... And we are, and so is CSX, committed to this being an Alaska
project in every possible way it can be under the law. And we're
aware of the training facilities in Kenai. We've worked with
organized labor to see how we might train people rather than import
people."
Number 0405
REPRESENTATIVE ROKEBERG mentioned a list of ten or more permits and
asked, "In a nutshell, what would be your opinion about the ability
to obtain permitting separate from these, and what type of time
frame will it take to go through this -- we're in this battle now -
- vis-a-vis the time that these were obtained?"
Number 0413
MR. LEWIS said, "Having endured it, it wasn't a very pleasant
process. These were all very public permits. Some of them are
exclusive to Yukon Pacific, some could probably be duplicated by
others. I would suggest that ... it doesn't seem very necessary,
given the body of work that sits here and the assets that we would
contribute to the project. I don't know that its doable. I know
it's not necessary. I think it constitutes a very grave threat to
the time line that I think we all agree on, to bring this project
on-line around the year 2005.
"We have worked very, very closely with the environmental
community, very quietly. We have funded something called the TAGS
Environmental Review Committee approaching now nine years. This is
a committee formed and funded, really, through the Alaska
Conservation Foundation, funded by Yukon Pacific. They in turn
pick the people involved. There's a coordinator with whom we
interface on a nearly-daily basis. We have worked diligently to
inform the environmental community throughout this permitting
process about the impacts of the project, about everything about
the project, so that they would understand the nuances in a way
they might not otherwise. And it's been an extremely valuable
experiment that, insofar as I know, has never been done anywhere
else. So it's hard to quantify how that impacts these. I just
want to suggest to you it was at work throughout this whole
process."
Number 0444
CO-CHAIRMAN OGAN advised that due to time constraints, questions
would be closed at that time. He thanked all the producers, Yukon
Pacific Corporation and the committee members. He noted that the
international press had released possible negative perceptions.
"And I would like to focus on the positive," he stated, "and the
fact that there has been ... really significant progress made in
the last year or so .... I think all the players, I expect that
they're all coming to the table in good faith with this memorandum
of understanding. And I personally, as chairman of the Resources
Committee, will be very intensely interested in furthering of this
process and will do whatever I can to facilitate that spirit of
cooperation that I believe we all expect here." He concluded,
"It's imperative that we all work together ... as a team to
facilitate this."
CO-CHAIRMAN OGAN advised that the House Special Committee on Oil
and Gas planned to waive the resolution.
CHAIRMAN HODGINS indicated the necessary signatures had been
obtained.
Number 0470
REPRESENTATIVE BARNES made a motion to move CSHCR 1(WTR) from the
House Resources Standing Committee with individual recommendations
and the two accompanying zero fiscal notes. She asked unanimous
consent.
CO-CHAIRMAN OGAN asked if there were objections. There being none,
CSHCR 1(WTR) moved from the House Resources Standing Committee.
ADJOURNMENT
CO-CHAIRMAN OGAN adjourned the Joint House Resources Standing
Committee/Special Committee on Oil and Gas meeting at 12:01 p.m.
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